Asia Day Ahead: Nikkei extend gains, HSI remains subdued

Asia Open

The Asian session looks set for a steady start in today’s session, with Nikkei +0.56% and ASX +0.59% at the time of writing. Korean markets are closed for holiday today. Overnight, risk sentiments continue to ride on the all-clear signal, after US July consumer price index (CPI) showed further disinflation in US consumer prices, in line with the softer producer prices data a day earlier. The inflation data will reinforce the view that Federal Reserve (Fed) rate cut will be coming in September, but the modest 0.1% progress in both the headline and core read seem to drive less dovish views with a lean towards a 25 basis point (bp) cut, versus the 50 bp move priced initially.

With inflation risks more on the backseat, market focus will continue to shift towards growth conditions, which should see the soft landing debate heat up ahead. Some attention will revolve around the US retail sales data today, with expectations looking for a 0.3% month-on-month increase in July, coming off a flat growth in June. Any disappointment on that front could reignite recession chatters, amid a weaker job market and rising household debt.

Before that, China’s monthly ‘data dump’ will take focus, with retail sales expected to recover to 2.6% from previous 2.0% while industrial production and fixed asset investment may stay unchanged. Overall, it may not be enough to convince markets of a more sustained recovery in China just yet, but any upside surprise will be a positive step in reflecting some stabilisation, which may offer some calm for Chinese equities following yesterday’s downbeat performance.

On another front, Japan’s 2Q gross domestic product (GDP) has been promising, with a strong beat of 3.1% versus 2.1% expected. The income-spending cycle has been taking shape, reflected in a boost in private consumption, which should set the path for further policy normalisation from the Bank of Japan (BoJ). With the bulk of the yen-carry unwinding potentially behind us, we may expect Japanese equities to find room for further recovery with this piece of data.

Nikkei recovers to 50% Fibonacci retracement

The Nikkei has recovered more than 20% from last Monday’s low thus far, with the index now at its 50% Fibonacci retracement level at the 36,452 level. Ahead, the 200-day moving average (MA) at the 37,300 level may be on watch for a retest, with the trendline previously supporting the index on October 2023 but will now serve as resistance to overcome following a breakdown at the start of the month. Reclaiming the 200-day MA could set the path for the index to retest the 37,900 level next, where the 61.8% Fibonacci level stands.

Hang Seng Index (HSI) still trading on a descending channel

The HSI has been drifting lower since hitting a high in May this year, with moves trading within a descending channel pattern for now. Its daily relative strength index (RSI) has failed to cross back above its mid-line thus far, having been rejected once more this week, which seems to leave sellers in control. Ahead, any recovery may potentially find resistance at the upper channel trendline at the 17,314 level. Trading within the channel could call for a drift lower towards the lower channel trendline, which stands in line with last Monday’s low at the 16,436 level.